Richmond Mutual Bancorporation, Inc. 10-Q

ITEM 1.FINANCIAL STATEMENTS Richmond Mutual Bancorporation, Inc. Condensed Consolidated Balance Sheets September 30, 2021 December 31, 2020 (Unaudited) Assets Cash and due from banks $ 11,308,688 $ 16,748,093 Interest-bearing demand deposits 8,528,617 32,020,364 Cash and cash equivalents 19,837,305 48,768,457 Investment securities - available for sale 358,108,288 244,505,189 Investment securities - held to maturity 9,549,322 12,225,275 Loans held for sale 903,200 1,986,650 Loans and leases, net of allowance for losses of $ 11,849,000 and $ 10,586,000 , respectively 795,407,222 734,413,448 Premises and equipment, net 14,226,532 14,892,110 Federal Home Loan Bank stock 9,542,400 9,049,600 Interest receivable 4,011,771 4,703,604 Mortgage-servicing rights 1,734,574 1,712,138 Cash surrender value of life insurance 3,595,730 3,525,736 Other assets 13,795,892 8,410,450 Total assets $ 1,230,712,236 $ 1,084,192,657 Liabilities Noninterest-bearing deposits 106,166,600 98,724,887 Interest-bearing deposits 718,090,230 594,320,508 Total deposits 824,256,830 693,045,395 Federal Home Loan Bank advances 202,000,000 170,000,000 Advances by borrowers for taxes and insurance 558,188 492,524 Interest payable 198,814 222,118 Multi-employer pension plan liability 17,454,709 17,454,709 Other liabilities 7,605,996 10,265,203 Total liabilities 1,052,074,537 891,479,949 Commitments and Contingent Liabilities — — Stockholders' Equity Common stock, $ 0.01 par value Authorized - 90,000,000 shares Issued and outstanding - 12,432,184 shares and 13,193,760 shares at September 30, 2021 and December 31, 2020, respectively 124,322 131,938 Additional paid-in capital 114,653,448 124,246,425 Retained earnings 78,237,829 78,290,113 Unearned employee stock ownership plan (ESOP) ( 13,112,188 ) ( 13,664,373 ) Accumulated other comprehensive (loss) income ( 1,265,712 ) 3,708,605 Total stockholders' equity 178,637,699 192,712,708 Total liabilities and stockholders' equity $ 1,230,712,236 $ 1,084,192,657 See Notes to Condensed Consolidated Statements. 1 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Income (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Interest Income Loans and leases $ 10,437,783 $ 9,719,323 $ 30,161,755 $ 28,264,455 Investment securities 1,456,124 1,017,201 3,714,207 3,458,621 Other 6,581 9,376 19,559 145,853 Total interest income 11,900,488 10,745,900 33,895,521 31,868,929 Interest Expense Deposits 1,253,901 1,545,183 3,662,562 5,074,191 Borrowings 688,533 763,055 2,083,095 2,272,700 Total interest expense 1,942,434 2,308,238 5,745,657 7,346,891 Net Interest Income 9,958,054 8,437,662 28,149,864 24,522,038 Provision for losses on loans and leases 500,000 1,300,000 1,430,000 2,830,000 Net Interest Income After Provision for Losses on Loans and Leases 9,458,054 7,137,662 26,719,864 21,692,038 Noninterest Income Service charges on deposit accounts 236,204 150,653 629,425 510,922 Card fee income 266,497 218,482 783,700 599,837 Loan and lease servicing fees ( 181,498 ) ( 41,657 ) ( 38,210 ) 193,881 Net gains on securities (includes $ 17,887 , $ 117,304 , $ 55,799 , and $ 196,317 , respectively, related to accumulated other comprehensive income reclassifications) 17,887 117,304 55,799 196,317 Net gains on loan and lease sales 556,664 1,327,639 2,090,892 2,586,515 Other income 249,184 220,180 791,648 767,764 Total noninterest income 1,144,938 1,992,601 4,313,254 4,855,236 Noninterest Expenses Salaries and employee benefits 4,217,780 3,647,479 12,977,382 10,281,475 Net occupancy expenses 321,473 307,925 945,806 882,915 Equipment expenses 334,187 308,146 985,951 844,849 Data processing fees 512,917 446,543 1,601,704 1,395,417 Deposit insurance expense 76,000 80,000 211,000 196,000 Printing and office supplies 44,705 32,440 122,516 91,080 Legal and professional fees 302,528 271,137 937,569 839,318 Advertising expense 103,118 71,090 268,988 260,903 Bank service charges 39,327 40,278 99,074 106,098 Real estate owned expense 4,329 350 15,031 3,516 Loss on sale of real estate owned — — 1,278 — Other expenses 887,939 779,791 2,535,140 2,254,922 Total noninterest expenses 6,844,303 5,985,179 20,701,439 17,156,493 Income Before Income Tax Expense 3,758,689 3,145,084 10,331,679 9,390,781 Provision for income taxes (includes $ 3,756 , $ 24,634 , $ 11,718 , and $ 41,226 , respectively, related to income tax expense from reclassification of items) 676,414 613,531 1,905,571 1,900,905 Net Income $ 3,082,275 $ 2,531,553 $ 8,426,108 $ 7,489,876 Earnings Per Share Basic $ 0.28 $ 0.21 $ 0.74 $ 0.60 Diluted $ 0.27 $ 0.21 $ 0.72 $ 0.60 See Notes to Condensed Consolidated Statements. 2 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net Income $ 3,082,275 $ 2,531,553 $ 8,426,108 $ 7,489,876 Other Comprehensive Income (Loss) Unrealized (loss) gain on available-for-sale securities, net of tax (benefit) expense of $( 774,714 ), $ 45,101 , $( 1,310,569 ), and $ 1,040,994 , respectively. ( 2,914,399 ) 169,667 ( 4,930,236 ) 3,916,120 Less: reclassification adjustment for realized gains included in net income, net of tax expense of $ 3,756 , $ 24,634 , $ 11,718 , and $ 41,226 , respectively. 14,131 92,670 44,081 155,090 ( 2,928,530 ) 76,997 ( 4,974,317 ) 3,761,030 Comprehensive Income $ 153,745 $ 2,608,550 $ 3,451,791 $ 11,250,906 See Notes to Condensed Consolidated Statements. 3 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income Total Shares Outstanding Amount Balances, June 30, 2021 12,684,977 $ 126,850 $ 118,118,524 $ 75,957,135 $ ( 13,296,017 ) $ 1,662,818 $ 182,569,310 Net income — — — 3,082,275 — — 3,082,275 Other comprehensive loss — — — — — ( 2,928,530 ) ( 2,928,530 ) ESOP shares earned — — 23,233 — 183,829 — 207,062 Stock based compensation — — 387,853 — — — 387,853 Exercise of stock options 12,116 121 127,460 — — — 127,581 Common stock dividends ($ 0.07 per share) — — — ( 801,581 ) — — ( 801,581 ) Repurchase of common stock ( 264,909 ) ( 2,649 ) ( 4,003,622 ) — — — ( 4,006,271 ) Balances, September 30, 2021 12,432,184 $ 124,322 $ 114,653,448 $ 78,237,829 $ ( 13,112,188 ) $ ( 1,265,712 ) $ 178,637,699 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income/(Loss) Total Shares Outstanding Amount Balances, December 31, 2020 13,193,760 $ 131,938 $ 124,246,425 $ 78,290,113 $ ( 13,664,373 ) $ 3,708,605 $ 192,712,708 Net income — — — 8,426,108 — — 8,426,108 Other comprehensive loss — — — — — ( 4,974,317 ) ( 4,974,317 ) ESOP shares earned — — 28,391 — 552,185 — 580,576 Granting of restricted stock awards 4,000 40 ( 40 ) — — — — Stock based compensation — — 1,423,236 — — — 1,423,236 Exercise of stock options 12,116 121 127,460 — — — 127,581 Common stock dividends ($ 0.21 per share) — — — ( 2,476,945 ) — — ( 2,476,945 ) Common stock dividends ($ 0.50 per share) — — — ( 6,001,447 ) — — ( 6,001,447 ) Repurchase of common stock ( 777,692 ) ( 7,777 ) ( 11,172,024 ) — — — ( 11,179,801 ) Balances, September 30, 2021 12,432,184 $ 124,322 $ 114,653,448 $ 78,237,829 $ ( 13,112,188 ) $ ( 1,265,712 ) $ 178,637,699 4 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income Total Shares Outstanding Amount Balances, June 30, 2020 13,526,625 $ 135,266 $ 132,563,670 $ 74,446,405 $ ( 14,032,728 ) $ 3,023,289 $ 196,135,902 Net income — — — 2,531,553 — — 2,531,553 Other comprehensive income — — — — — 76,997 76,997 ESOP shares earned — — ( 32,281 ) — 183,828 — 151,547 Common stock dividends ($ 0.05 per share) — — — ( 605,081 ) — — ( 605,081 ) Repurchase of common stock ( 582,079 ) ( 5,821 ) ( 6,610,672 ) — — — ( 6,616,493 ) Balances, September 30, 2020 12,944,546 $ 129,445 $ 125,920,717 $ 76,372,877 $ ( 13,848,900 ) $ 3,100,286 $ 191,674,425 Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive Income/(Loss) Total Shares Outstanding Amount Balances, December 31, 2019 13,526,625 $ 135,266 $ 132,601,876 $ 70,111,434 $ ( 14,400,386 ) $ ( 660,744 ) $ 187,787,446 Net income — — — 7,489,876 — — 7,489,876 Other comprehensive income — — — — — 3,761,030 3,761,030 ESOP shares earned — — ( 70,487 ) — 551,486 — 480,999 Common stock dividends ($ 0.10 per share) — — — ( 1,228,433 ) — — ( 1,228,433 ) Repurchase of common stock ( 582,079 ) ( 5,821 ) ( 6,610,672 ) — — — ( 6,616,493 ) Balances, September 30, 2020 12,944,546 $ 129,445 $ 125,920,717 $ 76,372,877 $ ( 13,848,900 ) $ 3,100,286 $ 191,674,425 See Notes to Condensed Consolidated Statements. 5 Richmond Mutual Bancorporation, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2021 2020 Operating Activities Net income $ 8,426,108 $ 7,489,876 Items not requiring (providing) cash Provision for loan losses 1,430,000 2,830,000 Depreciation and amortization 858,190 740,482 Deferred income tax ( 393,026 ) ( 679,933 ) Stock based compensation 1,423,236 — Investment securities amortization, net 1,977,350 1,848,533 Investment securities gains ( 55,799 ) ( 196,317 ) Net gains on loan and lease sales ( 2,090,892 ) ( 2,586,515 ) Loss on sale of real estate owned 1,278 — Accretion of loan origination fees ( 2,530,686 ) ( 849,503 ) Amortization of mortgage-servicing rights 320,193 355,146 ESOP shares expense 580,576 480,999 Increase in cash surrender value of life insurance ( 69,994 ) ( 90,240 ) Loans originated for sale ( 65,375,624 ) ( 79,876,240 ) Proceeds on loans sold 64,292,174 81,621,903 Net change in Interest receivable 691,833 ( 1,778,037 ) Other assets ( 3,470,593 ) 1,152,716 Other liabilities ( 2,659,207 ) ( 2,838,842 ) Interest payable ( 23,304 ) ( 54,902 ) Net cash provided by operating activities 3,331,813 7,569,126 Investing Activities Purchases of securities available for sale ( 176,924,319 ) ( 129,901,076 ) Proceeds from maturities and paydowns of securities available for sale 49,817,156 68,279,489 Proceeds from sales of securities available for sale 5,296,929 34,737,656 Proceeds from maturities and paydowns of securities held to maturity 2,664,935 3,585,017 Net change in loans ( 56,209,011 ) ( 65,198,318 ) Proceeds from sales of real estate owned 30,270 — Purchases of premises and equipment ( 192,612 ) ( 1,410,931 ) Purchase of FHLB stock ( 492,800 ) ( 1,569,200 ) Net cash used in investing activities ( 176,009,452 ) ( 91,477,363 ) Financing Activities Net change in Demand and savings deposits 62,873,251 71,899,362 Certificates of deposit 68,338,184 ( 26,061,187 ) Advances by borrowers for taxes and insurance 65,664 16,042 Proceeds from FHLB advances 134,000,000 64,000,000 Repayment of FHLB advances ( 102,000,000 ) ( 42,000,000 ) Repurchase of common stock ( 11,179,801 ) ( 6,616,493 ) Proceeds from stock option exercises 127,581 — Dividends paid ( 8,478,392 ) ( 1,228,433 ) Net cash provided by financing activities 143,746,487 60,009,291 Net Change in Cash and Cash Equivalents ( 28,931,152 ) ( 23,898,946 ) Cash and Cash Equivalents, Beginning of Period 48,768,457 40,596,877 Cash and Cash Equivalents, End of Period $ 19,837,305 $ 16,697,931 Additional Cash Flows and Supplementary Information Interest paid $ 5,768,961 $ 7,401,793 Transfers from loans to other real estate owned — 31,548 See Notes to Condensed Consolidated Statements. 6 Richmond Mutual Bancorporation, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Table Dollar Amounts in Thousands, Except Per Share Amounts) Note 1: Basis of Presentation On July 1, 2019, Richmond Mutual Bancorporation, Inc., a Delaware corporation (“RMB-Delaware”), completed its reorganization from a mutual holding company form of organization to a stock form of organization (“corporate reorganization”). RMB-Delaware, which owned 100% of First Bank Richmond (the “Bank”), was succeeded by Richmond Mutual Bancorporation, Inc., a new Maryland corporation (“RMB-Maryland”). As part of the corporate reorganization, First Mutual of Richmond, Inc.’s (“MHC”) ownership interest in RMB-Delaware was sold in a public offering. Gross proceeds from the offering were $ 130.3 million. In conjunction with the corporate reorganization, RMB-Maryland contributed 500,000 shares and $ 1.25 million of cash to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”). Additionally, a “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to MHC’s ownership interest in the retained earnings of RMB-Delaware as of December 31, 2017 and March 31, 2019. In certain circumstances, where appropriate, the terms “Company”, “we”, “us” and “our” refer collectively to (i) RMB-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the corporate reorganization and (ii) RMB-Maryland and First Bank Richmond with respect to discussions in this document involving matters occurring post-corporate reorganization, in each case unless the context indicates another meaning. The costs of the corporate reorganization and the issuance of the common stock have been deducted from the sales proceeds of the offering. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or note disclosures necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2021 (SEC File No. 001-38956). However, in the opinion of management, all adjustments which are necessary for a fair presentation of the consolidated financial statements have been included. Those adjustments consist only of normal recurring adjustments. The results of operations for the period are not necessarily indicative of the results to be expected for the full year. Loans For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The Company charges off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance, which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value, less costs to sell when the loan is 120 days past due, charge-off of unsecured open-end loans when the loan is 90 days past due, and charge down to the net realizable value when other secured loans are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off. For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the 7 principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months. Certain reclassifications have been made to the 2020 financial statements to conform to the 2021 financial statement presentation. These reclassifications had no effect on net income. Note 2: Accounting Pronouncements In March 2020, the novel coronavirus disease of 2019 ("COVID-19") was identified as a global pandemic and began affecting the health of large populations around the world. As a result of the spread of COVID-19, economic uncertainties arose which can ultimately affect the financial position, results of operations and cash flows of the Company, as well as the Company's customers. In response to economic concerns over COVID-19, in March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was passed into law by the United States Congress ("Congress"). The CARES Act included relief for individual Americans, health care workers, small businesses and certain industries hit hard by the COVID-19 pandemic. The 2021 Consolidated Appropriations Act , passed by Congress in December 2020, extended certain provisions of the CARES Act affecting the Company into 2021. The CARES Act included several provisions designed to help financial institutions like the Company in working with their customers. Section 4013 of the CARES Act, as extended, allows a financial institution to elect to suspend generally accepted accounting principles and regulatory determinations with respect to qualifying loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring ("TDR") until January 1, 2022. The Company has taken advantage of this provision to extend certain payment modifications to loan customers in need. As of September 30, 2021, the Company had no loans outstanding that were modified under the CARES Act guidance. The CARES Act also approved the Paycheck Protection Program ("PPP"), administered by the Small Business Administration ("SBA") with funding provided by financial institutions. The 2021 Consolidated Appropriations Act approved a new round of PPP loans in 2021. The PPP provides loans to eligible businesses through financial institutions like the Company, with loans being eligible for forgiveness of some or all of the principal amount by the SBA if the borrower meets certain requirements. The SBA guarantees repayment of the loans to the Company if the borrower's loan is not forgiven and is then not repaid by the borrower. The Company earns a 1% interest rate on PPP loans, plus a processing fee from the SBA for processing and originating a loan. The Company had originated approximately $ 103.1 million in PPP loans as of September 30, 2021, of which approximately $ 16.3 million were outstanding at September 30, 2021. The Jumpstart Our Business Startups Act (the "JOBS Act"), enacted in April 2012, made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as and has elected to be an emerging growth company under the JOBS Act. An emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company. In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” (ASU 2019-05). This ASU provides transition relief for entities adopting the FASB’s credit losses standard, ASU 8 2016-13 and allows companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for certain financial instruments. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (ASU 2019-04). This ASU clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. In October 2019, the FASB voted to extend the implementation of ASU No. 2016-13 for certain financial institutions including smaller reporting companies. As a result, ASU 2016-13 will be effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is evaluating its current expected loss methodology on the loan and investment portfolios to identify the necessary modifications in accordance with this standard. The Company has not quantified the impact of these ASUs. The Company is evaluating its historical data available for use in adoption of the new credit loss standards. Additionally, we have formed an implementation team that meets on a regular basis to coordinate efforts of our accounting, credit and operations areas. We will continue to evaluate methodologies available to us under the new standard. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of ASU 2020-04 did not have a material impact on the Company's consolidated financial statements. In October 2020, the FASB issued ASU 2020-08, “Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of ASU 2020-08 did not have a material impact on the Company's consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU 2019-12 provides that state franchise or similar taxes that are based, at least in part on an entity’s income, be included in an entity’s income tax recognized as income-based taxes. The ASU further clarifies that the effect of any change in tax laws or rates used in the computation of the annual effective tax rate are required to be reflected in the first interim period that includes the enactment date of the legislation. Technical changes to eliminate exceptions to Topic 740 related to intra-period tax allocations for entities with losses from continuing operations, deferred tax liabilities related to change in ownership of foreign entities, and interim-period tax allocations for businesses with losses where the losses are expected to be realized. The amendments in ASU 2019-12 are effective for public business entities with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. For the Company, the amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2021. Based on leases outstanding as of December 31, 2020, the new standard will not have a material impact on the Company’s balance sheet or income statement. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provide entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current GAAP (Topic 842, Leases). The amendments in ASU 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met. 9 Note 3: Investment Securities The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows: September 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale SBA Pools $ 9,310 $ 81 $ 101 $ 9,290 Federal agencies 15,000 2 126 14,876 State and municipal obligations 161,948 1,778 3,062 160,664 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 170,190 1,295 1,478 170,007 Corporate obligations 3,250 11 3 3,258 Equity securities 13 — — 13 359,711 3,167 4,770 358,108 Held to maturity State and municipal obligations 9,549 179 1 9,727 9,549 179 1 9,727 Total investment securities $ 369,260 $ 3,346 $ 4,771 $ 367,835 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale SBA Pools $ 16,283 $ 111 $ 94 $ 16,300 Federal agencies 5,760 12 15 5,757 State and municipal obligations 93,616 2,778 109 96,285 Mortgage-backed securities - government-sponsored enterprises (GSE) residential 124,139 2,080 69 126,150 Equity securities 13 — — 13 239,811 4,981 287 244,505 Held to maturity State and municipal obligations 12,225 295 — 12,520 12,225 295 — 12,520 Total investment securities $ 252,036 $ 5,276 $ 287 $ 257,025 The amortized cost and fair value of securities at September 30, 2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 10 Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 2,170 $ 2,178 $ 1,915 $ 1,929 One to five years 6,673 6,851 5,546 5,668 Five to ten years 36,130 36,434 1,198 1,236 After ten years 144,535 142,623 890 894 189,508 188,086 9,549 9,727 Mortgage-backed securities –GSE residential 170,190 170,009 — — Equity securities 13 13 — — Totals $ 359,711 $ 358,108 $ 9,549 $ 9,727 Securities with a carrying value of $ 148,262,000 and $ 88,370,000 were pledged at September 30, 2021 and December 31, 2020, respectively, to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities available for sale for the three and nine months ended September 30, 2021 were $ 1,316,000 and $ 5,297,000 , respectively. For the three and nine months ended September 30, 2020, proceeds from the sales of securities available for sale were $ 12,560,000 and $ 34,738,000 , respectively. Gross gains were recognized on the sale of securities available-for-sale for the three and nine months ended September 30, 2021 and 2020 of $ 18,000 , $ 56,000 , $ 120,000 , and $ 255,000 , respectively. There were no gross losses recognized on the sale of securities available for sale for the three and nine months ended September 30, 2021. Gross losses of $ 3,000 and $ 59,000 were recognized on the sale of securities available-for-sale for the three and nine months ended September 30, 2020, respectively. Certain investments in debt securities, as reflected in the table below, are reported in the condensed consolidated financial statements and notes at an amount less than their historical cost. Total fair value of these investments at September 30, 2021 and December 31, 2020 was $ 211,218,000 and $ 45,299,000 , respectively, which is approximately 57 % and 18 % of the Company’s aggregated available-for-sale and held-to-maturity investment portfolio at those dates, respectively. These declines primarily resulted from changes in market interest rates since their purchase. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any other securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. The following tables show the Company’s investments by gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020: 11 Description of Securities September 30, 2021 Less Than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-sale SBA Pools $ 1,827 $ 77 $ 3,473 $ 24 $ 5,300 $ 101 Federal agencies 12,874 126 — — 12,874 126 State and municipal obligations 91,345 2,815 5,064 247 96,409 3,062 Mortgage-backed securities - GSE residential 92,092 1,460 2,123 18 94,215 1,478 Corporate obligations 1,997 3 — — 1,997 3 Total available-for-sale 200,135 4,481 10,660 289 210,795 4,770 Held-to-maturity State and municipal obligations 423 1 — — 423 1 Total temporarily impaired securities $ 200,558 $ 4,482 $ 10,660 $ 289 $ 211,218 $ 4,771 Description of Securities December 31, 2020 Less Than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-sale SBA Pools $ 5,213 $ 46 $ 5,687 $ 48 $ 10,900 $ 94 Federal agencies 985 15 — — 985 15 State and municipal obligations 8,587 109 — — 8,587 109 Mortgage-backed securities - GSE residential 24,013 67 684 2 24,697 69 Total available-for-sale 38,798 237 6,371 50 45,169 287 Held-to-maturity State and municipal obligations 130 — — — 130 — Total temporarily impaired securities $ 38,928 $ 237 $ 6,371 $ 50 $ 45,299 $ 287 Federal Agencies. The unrealized losses on the Company’s investments in direct obligations of U.S. federal agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021. Mortgage-Backed Securities – GSE Residential and SBA Pools. The unrealized losses on the Company’s investment in mortgage-backed securities and SBA pools were caused by interest rate changes and illiquidity. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021. State and Municipal Obligations. The unrealized losses on the Company’s investments in securities of state and municipal obligations were caused by interest rate changes and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before 12 recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2021. Note 4: Loans, Leases and Allowance The following table shows the composition of the loan and lease portfolio at September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 Commercial mortgage $ 255,211 $ 247,564 Commercial and industrial 101,818 122,831 Construction and development 82,511 58,424 Multi-family 92,652 55,998 Residential mortgage 131,094 125,121 Home equity 6,784 5,982 Direct financing leases 123,025 117,171 Consumer 15,347 13,257 808,442 746,348 Less Allowance for loan and lease losses 11,849 10,586 Deferred loan fees 1,186 1,349 $ 795,407 $ 734,413 The following tables present the activity in the allowance for loan and lease losses for the three and nine months ended September 30, 2021 and 2020: Balance, beginning of period Provision (credit) for losses Charge-offs Recoveries Balance, end of period Three Months Ended September 30, 2021: Commercial mortgage $ 4,517 $ 156 $ ( 25 ) $ 7 $ 4,655 Commercial and industrial 1,951 ( 214 ) — 21 1,758 Construction and development 2,009 88 — — 2,097 Multi-family 1,353 273 — — 1,626 Residential mortgage 368 138 ( 80 ) 16 442 Home equity 23 5 — — 28 Leases 1,010 59 ( 31 ) 9 1,047 Consumer 200 ( 5 ) ( 8 ) 9 196 Total $ 11,431 $ 500 $ ( 144 ) $ 62 $ 11,849 Nine Months Ended September 30, 2021: Commercial mortgage $ 4,628 $ 33 $ ( 25 ) $ 19 $ 4,655 Commercial and industrial 2,271 ( 580 ) ( 3 ) 70 1,758 Construction and development 1,068 1,029 — — 2,097 Multi-family 1,039 587 — — 1,626 Residential mortgage 323 126 ( 80 ) 73 442 Home equity 18 10 — — 28 Leases 1,054 201 ( 396 ) 188 1,047 Consumer 185 24 ( 83 ) 70 196 Total $ 10,586 $ 1,430 $ ( 587 ) $ 420 $ 11,849 13 Balance, beginning of period Provision (credit) for losses Charge-offs Recoveries Balance, end of period Three Months Ended September 30, 2020: Commercial mortgage $ 3,484 $ 699 $ — $ 10 $ 4,193 Commercial and industrial 1,815 265 — 23 2,103 Construction and development 871 53 — 1 925 Multi-family 840 229 — — 1,069 Residential mortgage 517 ( 94 ) — 17 440 Home equity 19 2 — — 21 Leases 838 93 ( 110 ) 70 891 Consumer 137 53 ( 26 ) 3 167 Total $ 8,521 $ 1,300 $ ( 136 ) $ 124 $ 9,809 Nine Months Ended September 30, 2020: Commercial mortgage $ 2,930 $ 1,232 $ — $ 31 $ 4,193 Commercial and industrial 1,758 293 — 52 2,103 Construction and development 614 284 — 27 925 Multi-family 779 290 — — 1,069 Residential mortgage 441 ( 4 ) ( 35 ) 38 440 Home equity 5 13 — 3 21 Leases 426 662 ( 300 ) 103 891 Consumer 136 60 ( 47 ) 18 167 Total $ 7,089 $ 2,830 $ ( 382 ) $ 272 $ 9,809 The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on portfolio segment and impairment method as of September 30, 2021 and December 31, 2020: Allowance for loan and lease losses: Loans and leases: Individually evaluated for impairment Collectively evaluated for impairment Balance, September 30 Individually evaluated for impairment Collectively evaluated for impairment Balance, September 30 As of September 30, 2021: Commercial mortgage $ — $ 4,655 $ 4,655 $ 141 $ 255,070 $ 255,211 Commercial and industrial 301 1,457 1,758 1,017 100,801 101,818 Construction and development 750 1,347 2,097 4,900 77,611 82,511 Multi-family — 1,626 1,626 — 92,652 92,652 Residential mortgage — 442 442 202 130,892 131,094 Home equity — 28 28 — 6,784 6,784 Leases — 1,047 1,047 — 123,025 123,025 Consumer — 196 196 — 15,347 15,347 Total $ 1,051 $ 10,798 $ 11,849 $ 6,260 $ 802,182 $ 808,442 14 Allowance for loan and lease losses: Loans and leases: Individually evaluated for impairment Collectively evaluated for impairment Balance, December 31 Individually evaluated for impairment Collectively evaluated for impairment Balance, December 31 As of December 31, 2020: Commercial mortgage $ — $ 4,628 $ 4,628 $ 76 $ 247,488 $ 247,564 Commercial and industrial 202 2,069 2,271 1,118 121,713 122,831 Construction and development — 1,068 1,068 — 58,424 58,424 Multi-family — 1,039 1,039 — 55,998 55,998 Residential mortgage — 323 323 269 124,852 125,121 Home equity — 18 18 — 5,982 5,982 Leases — 1,054 1,054 — 117,171 117,171 Consumer — 185 185 — 13,257 13,257 Total $ 202 $ 10,384 $ 10,586 $ 1,463 $ 744,885 $ 746,348 The Company rates all loans and leases by credit quality using the following designations: Grade 1 – Exceptional Exceptional loans and leases are top-quality loans to individuals whose financial credentials are well known to the Company. These loans and leases have excellent sources of repayment, are well documented and/or virtually free of risk (i.e., CD secured loans). Grade 2 – Quality Loans and Leases These loans and leases have excellent sources of repayment with no identifiable risk of collection, and they conform in all respects to Company policy and Indiana Department of Financial Institutions (“IDFI”) and Federal Deposit Insurance Corporation (“FDIC”) regulations. Documentation exceptions are minimal or are in the process of being corrected and are not of a type that could subsequently expose the Company to risk of loss. Grade 3 – Acceptable Loans This category is for “average” quality loans and leases. These loans and leases have adequate sources of repayment with little identifiable risk of collection and they conform to Company policy and IDFI/FDIC regulations. Grade 4 – Acceptable but Monitored Loans and leases in this category may have a greater than average risk due to financial weakness or uncertainty but do not appear to require classification as special mention or substandard loans. Loans and leases rated “4” need to be monitored on a regular basis to ascertain that the reasons for placing them in this category do not advance or worsen. Grade 5 – Special Mention Loans and leases in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company’s credit position at some future date. Special Mention loans and leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. This special mention rating is designed to identify a specific level of risk and concern about an asset’s quality. Although a special mention loan or leases has a higher probability of default than a pass rated loan or lease, its default is not imminent. Grade 6 – Substandard Loans and leases in this category are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. 15 Substandard loans and leases have a high probability of payment default, or they have other well-defined weaknesses. Such loans and leases have a distinct potential for loss; however, an individual loan’s or lease’s potential for loss does not have to be distinct for the loan or lease to be rated substandard. The following are examples of situations that might cause a loan or lease to be graded a “6”: • Cash flow deficiencies (losses) jeopardize future loan or lease payments. • Sale of non-collateral assets has become a primary source of loan or lease repayment. • The relationship has deteriorated to the point that sale of collateral is now the Company’s primary source of repayment, unless this was the original source of loan or lease repayment. • The borrower is bankrupt or for any other reason future repayment is dependent on court action. Grade 7 – Doubtful A loan or lease classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. A doubtful loan or lease has a high probability of total or substantial loss. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, nonaccrual accounting treatment will be required for doubtful loans and leases. Grade 8 – Loss Loans and leases classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan or lease even though partial recovery may be effected in the future. No material changes have been made to the risk characteristics pertaining to the loan and lease portfolio contained in the Company's 2020 Form 10-K. The following tables present the credit risk profile of the Company’s loan and lease portfolio based on rating category and payment activity as of September 30, 2021 and December 31, 2020: Pass Special Mention Substandard Doubtful Loss Total As of September 30, 2021: Commercial mortgage $ 251,470 $ 3,600 $ 141 $ — $ — $ 255,211 Commercial and industrial 94,691 5,773 1,354 — — 101,818 Construction and development 77,611 — 4,900 — — 82,511 Multi-family 92,652 — — — — 92,652 Residential mortgage 128,698 — 2,396 — — 131,094 Home equity 6,733 — 51 — — 6,784 Leases 122,961 — 16 48 — 123,025 Consumer 15,325 — 22 — — 15,347 Total $ 790,141 $ 9,373 $ 8,880 $ 48 $ — $ 808,442 16 Pass Special Mention Substandard Doubtful Loss Total As of December 31, 2020: Commercial mortgage $ 239,055 $ 6,976 $ 1,533 $ — $ — $ 247,564 Commercial and industrial 114,411 5,542 2,878 — — 122,831 Construction and development 53,524 4,900 — — — 58,424 Multi-family 55,998 — — — — 55,998 Residential mortgage 121,976 — 3,145 — — 125,121 Home equity 5,916 — 66 — — 5,982 Leases 117,136 — 15 20 — 117,171 Consumer 13,256 — 1 — — 13,257 Total $ 721,272 $ 17,418 $ 7,638 $ 20 $ — $ 746,348 The following tables present the Company’s loan and lease portfolio aging analysis of the recorded investment in loans and leases as of September 30, 2021 and December 31, 2020: September 30, 2021 Delinquent Loans and Leases Current Total Portfolio Loans and Leases Total Loans and Leases > 90 Days Accruing 30-59 Days Past Due 60-89 Days Past Due 90 Days and Over Total Past Due Commercial mortgage $ 640 $ 394 $ 141 $ 1,175 $ 254,036 $ 255,211 $ — Commercial and industrial 148 594 372 1,114 100,704 101,818 — Construction and development 3 — 4,900 4,903 77,608 82,511 — Multi-family — 1,209 — 1,209 91,443 92,652 — Residential mortgage 643 227 2,371 3,241 127,853 131,094 2,250 Home equity 116 — 12 128 6,656 6,784 12 Leases 217 — 36 253 122,772 123,025 — Consumer 57 1 22 80 15,267 15,347 22 Totals $ 1,824 $ 2,425 $ 7,854 $ 12,103 $ 796,339 $ 808,442 $ 2,284 December 31, 2020 Delinquent Loans and Leases Current Total Portfolio Loans and Leases Total Loans and Leases > 90 Days Accruing 30-59 Days Past Due 60-89 Days Past Due 90 Days and Over Total Past Due Commercial mortgage $ 340 $ — $ 1,177 $ 1,517 $ 246,047 $ 247,564 $ 1,100 Commercial and industrial 1,251 203 439 1,893 120,938 122,831 — Construction and development — 4,900 — 4,900 53,524 58,424 — Multi-family — — — — 55,998 55,998 — Residential mortgage 1,913 243 2,680 4,836 120,285 125,121 2,554 Home equity 138 15 25 178 5,804 5,982 25 Leases 234 65 — 299 116,872 117,171 — Consumer 318 129 317 764 12,493 13,257 317 Totals $ 4,194 $ 5,555 $ 4,638 $ 14,387 $ 731,961 $ 746,348 $ 3,996 17 The following tables present the Company’s impaired loans and specific valuation allowance at September 30, 2021 and December 31, 2020: September 30, 2021 Recorded Balance Unpaid Principal Balance Specific Allowance Impaired loans without a specific valuation allowance Commercial mortgage $ 141 $ 199 $ — Commercial and industrial 372 571 — Residential mortgage 202 298 — $ 715 $ 1,068 $ — Impaired loans with a specific valuation allowance Commercial and industrial $ 645 $ 664 $ 301 Construction and development 4,900 4,900 750 $ 5,545 $ 5,564 $ 1,051 Total impaired loans Commercial mortgage $ 141 $ 199 $ — Commercial and industrial 1,017 1,235 301 Construction and development 4,900 4,900 750 Residential mortgage 202 298 — Total impaired loans $ 6,260 $ 6,632 $ 1,051 December 31, 2020 Recorded Balance Unpaid Principal Balance Specific Allowance Impaired loans without a specific valuation allowance Commercial mortgage $ 76 $ 86 $ — Commercial and industrial 439 770 — Residential mortgage 269 491 — $ 784 $ 1,347 $ — Impaired loans with a specific valuation allowance Commercial and industrial 679 689 202 $ 679 $ 689 $ 202 Total impaired loans Commercial mortgage $ 76 $ 86 $ — Commercial and industrial 1,118 1,459 202 Residential mortgage 269 491 — Total impaired loans $ 1,463 $ 2,036 $ 202 18 The following tables present the Company’s average investment in impaired loans and leases, and interest income recognized for the three and nine months ended September 30, 2021 and 2020: Average Investment in Impaired Loans and Leases Interest Income Recognized Three Months Ended September 30, 2021: Total impaired loans Commercial mortgage $ 171 $ 13 Commercial and industrial 1,022 13 Construction and development 4,900 — Residential mortgage 190 4 Total impaired loans and leases $ 6,283 $ 30 Average Investment in Impaired Loans and Leases Interest Income Recognized Nine Months Ended September 30, 2021: Total impaired loans Commercial mortgage $ 124 $ 23 Commercial and industrial 1,054 24 Construction and development 3,675 — Residential mortgage 185 7 Total impaired loans and leases $ 5,038 $ 54 Average Investment in Impaired Loans and Leases Interest Income Recognized Three Months Ended September 30, 2020: Total impaired loans Commercial mortgage $ 215 $ 5 Commercial and industrial 1,114 12 Residential mortgage 269 6 Total impaired loans and leases $ 1,598 $ 23 Average Investment in Impaired Loans and Leases Interest Income Recognized Nine Months Ended September 30, 2020: Total impaired loans Commercial mortgage $ 275 $ 10 Commercial and industrial 1,130 53 Residential mortgage 298 12 Total impaired loans and leases $ 1,703 $ 75 19 The following table presents the Company’s nonaccrual loans and leases at September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 Commercial mortgage $ 141 $ 76 Commercial and industrial 1,016 493 Construction 4,900 — Residential mortgage 121 214 Leases 48 20 $ 6,226 $ 803 During the three and nine months ended September 30, 2021 and 2020, there were no newly classified TDRs. For the three and nine months ended September 30, 2021 and 2020, the Company recorded no charge-offs related to TDRs. As of September 30, 2021 and December 31, 2020, TDRs had a related allowance of $ 51,000 and $ 52,000 , respectively. During the three and nine months ended September 30, 2021, there were no TDRs for which there was a payment default within the first 12 months of the modification. The CARES Act provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. As of September 30, 2021, the Company had no loan and lease modifications outstanding related to the COVID-19 pandemic in accordance with the CARES Act. Accordingly, the Company does not account for such loan modifications as TDRs. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. At September 30, 2021 and December 31, 2020, the balance of real estate owned included $ 0 and $ 32,000 , respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At September 30, 2021 and December 31, 2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process was $ 326,000 and $ 283,000 , respectively. The following lists the components of the net investment in direct financing leases: September 30, 2021 December 31, 2020 Total minimum lease payments to be received $ 135,495 $ 129,114 Initial direct costs 7,197 6,353 142,692 135,467 Less: Unearned income ( 19,667 ) ( 18,296 ) Net investment in direct finance leases $ 123,025 $ 117,171 Leases serviced by First Bank Richmond for the benefit of others totaled approximately $ 0 and $ 86,000 at September 30, 2021 and December 31, 2020, respectively. Additionally, certain leases have been sold with partial recourse. First Bank Richmond estimates and records its obligation based upon historical loss percentages. At both September 30, 2021 and December 31, 2020, First Bank Richmond recorded a recourse obligation on leases sold of $ 0 , and had a maximum exposure of $ 0 and $ 86,000 , respectively, for these leases. 20 The following table summarizes the future minimum lease payments receivable subsequent to September 30, 2021: 2021 $ 14,225 2022 47,802 2023 34,852 2024 23,235 2025 12,277 Thereafter 3,104 $ 135,495 Note 5: Fair Value of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities Recurring Measurements The following tables present the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2021 and December 31, 2020: Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2021 Available-for-sale securities SBA Pools $ 9,290 $ — $ 9,290 $ — Federal agencies 14,876 — 14,876 — State and municipal obligations 160,664 — 160,664 — Mortgage-backed securities - GSE residential 170,007 — 170,007 — Corporate obligations 3,258 — 3,258 — Equity securities 13 13 — — $ 358,108 $ 13 $ 358,095 $ — 21 Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2020 Available-for-sale securities SBA Pools $ 16,300 $ — $ 16,300 $ — Federal agencies 5,757 — 5,757 — State and municipal obligations 96,285 — 96,285 — Mortgage-backed securities - GSE residential 126,150 — 126,150 — Equity securities 13 13 — — $ 244,505 $ 13 $ 244,492 $ — Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the nine months ended September 30, 2021. Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy, which includes equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agency securities, obligations of state and political subdivisions, and mortgage-backed securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Nonrecurring Measurements The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2021 and December 31, 2020: Fair Value Measurements Using Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2021 Impaired loans, collateral dependent $ 4,656 $ — $ — $ 4,656 Mortgage-servicing rights 1,735 — — 1,735 December 31, 2020 Impaired loans, collateral dependent $ 532 $ — $ — $ 532 Mortgage-servicing rights 1,712 — — 1,712 22 Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Collateral-Dependent Impaired Loans, Net of ALLL The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results. Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans. Mortgage-Servicing Rights Mortgage-servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage-servicing rights are classified within Level 3 of the hierarchy. Mortgage-servicing rights are tested for impairment on a quarterly basis based on an independent valuation. The valuation is reviewed by management for accuracy and for potential impairment. Unobservable (Level 3) Inputs The following tables present the fair value measurement of assets recognized in the accompanying consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2021 and December 31, 2020: Fair Value at September 30, 2021 Valuation Technique Unobservable Inputs Range Collateral-dependent impaired loans $ 4,656 Appraisal Marketability discount 0 - 57 % Mortgage-servicing rights $ 1,735 Discounted cash flow Discount rate 10 % Fair Value at December 31, 2020 Valuation Technique Unobservable Inputs Range Collateral-dependent impaired loans $ 532 Appraisal Marketability discount 0 - 12 % Mortgage-servicing rights $ 1,712 Discounted cash flow Discount rate 10 % Fair Value of Financial Instruments The following tables present estimated fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020: 23 Fair Value Measurements Using Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2021 Financial assets Cash and cash equivalents $ 19,837 $ 19,837 $ — $ — Available-for-sale securities 358,108 13 358,095 — Held-to-maturity securities 9,549 — 9,727 — Loans held for sale 903 — — 910 Loans and leases receivable, net 795,407 — — 805,512 Federal Reserve and FHLB stock 9,542 — 9,542 — Interest receivable 4,012 — 4,012 — Financial liabilities Deposits 824,257 — 826,128 — FHLB advances 202,000 — 208,720 — Interest payable 199 — 199 — Fair Value Measurements Using Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2020 Financial assets Cash and cash equivalents $ 48,768 $ 48,768 $ — $ — Available-for-sale securities 244,505 13 244,492 — Held-to-maturity securities 12,225 — 12,520 — Loans held for sale 1,987 — — 2,021 Loans and leases receivable, net 734,413 — — 749,130 Federal Reserve and FHLB stock 9,050 — 9,050 — Interest receivable 4,704 — 4,704 — Financial liabilities Deposits 693,045 — 695,216 — FHLB advances 170,000 — 178,015 — Interest payable 222 — 222 — Note 6: Earnings per Share Basic EPS is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities. ESOP shares are not considered outstanding for EPS until they are earned. The following table presents the computation of basic and diluted EPS for the periods indicated: 24 Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Net income $ 3,082 $ 2,532 Shares outstanding for Basic EPS: Average shares outstanding 12,499,455 13,313,399 Less: average restricted stock award shares not vested 348,395 — Less: average unearned ESOP Shares 978,260 1,032,367 Shares outstanding for Basic EPS 11,172,800 12,281,032 Additional Dilutive Shares 300,652 — Shares outstanding for Diluted EPS 11,473,452 12,281,032 Basic Earnings Per Share $ 0.28 $ 0.21 Diluted Earnings Per Share $ 0.27 $ 0.21 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Net income $ 8,426 $ 7,490 Shares outstanding for Basic EPS: Average shares outstanding 12,837,793 13,455,031 Less: average restricted stock award shares not vested 404,509 — Less: average unearned ESOP Shares 991,686 1,045,788 Shares outstanding for Basic EPS 11,441,598 12,409,243 Additional Dilutive Shares 244,137 — Shares outstanding for Diluted EPS 11,685,735 12,409,243 Basic Earnings Per Share $ 0.74 $ 0.60 Diluted Earnings Per Share $ 0.72 $ 0.60 Note 7: Benefit Plans 401(k) The Company has a retirement savings 401(k) plan, in which substantially all employees may participate. The Company matches employees' contributions at the rate of 50 percent for the first six percent of base salary contributed by participants. The Company’s expense for the plan was $ 49,000 , $ 165,000 , $ 50,000 , and $ 156,000 for the three and nine months ended September 30, 2021 and 2020, respectively. Pension Plan The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “DB Plan”), an industry-wide, tax-qualified defined-benefit pension plan. The Company is in the process of terminating its participation in the Pentegra Defined Benefits Plan, which will require a payment of an amount based on the underfunded status of the plan, referred to as a withdrawal liability. In 2019, the Company estimated and accrued approximately $ 17.5 million for this withdrawal liability. This estimated withdrawal liability was calculated by plan administrators based on an interest rate of 2.35 %, Pri-2012 mortality tables with white collar adjustments, and an assumed December 31, 2019 withdrawal date. The Company’s actual termination expense will be based on the cost of purchasing annuities through an insurance company, and may be higher or lower depending on a number of factors, including the interest rate environment and the valuation of plan assets. Due to the 25 current low interest rate environment, terminating the DB Plan at this time would require the Company to incur a substantial additional expense over and above the amount presently accrued, as interest rates are even lower now than they were in 2019. As a result, the Company’s Board of Directors will continue to monitor and evaluate the timing of, and costs associated with, termination of the DB Plan, and it is currently uncertain when the termination of the DB Plan will be completed or what the actual costs of such termination will be. Any additional expenses associated with the termination of the DB Plan will negatively impact our results of operations in the future. We recorded ongoing expenses of $ 179,000 for the quarter ended September 30, 2021, in connection with the freezing of the DB Plan. Employee Stock Ownership Plan As part of the reorganization and related stock offering, the Company established an Employee Stock Ownership Plan, or ESOP, covering substantially all employees. The ESOP acquired 1,082,130 shares of Company common stock at an average price of $ 13.59 per share on the open market with funds provided by a loan from the Company. Dividends on unallocated shares used to repay the loan for the Company are recorded as a reduction of the loan or accrued interest, as applicable. Dividends on allocated shares paid to participants are reported as compensation expense. Unearned ESOP shares which have not yet been allocated to ESOP participants are excluded from the computation of average shares outstanding for earnings per share calculation. Accordingly, $ 13,112,188 and $ 13,664,373 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity at September 30, 2021 and December 31, 2020, respectively. Shares are released to participants proportionately as the loan is repaid. ESOP expense for the three and nine months ended September 30, 2021 and 2020 was $ 207,000 , $ 581,000 , $ 152,000 , and $ 481,000 , respectively. September 30, 2021 December 31, 2020 Earned ESOP shares 117,249 76,669 Unearned ESOP shares 964,881 1,005,461 Total ESOP shares 1,082,130 1,082,130 Quoted per share price $ 15.76 $ 13.66 Fair value of earned shares $ 1,848 $ 1,047 Fair value of unearned shares $ 15,207 $ 13,735 Richmond Mutual Bancorporation, Inc. 2020 Equity Incentive Plan On September 15, 2020, the Company's stockholders approved the Richmond Mutual Bancorporation, Inc. 2020 Equity Incentive Plan ("2020 EIP") which provides for the grant to eligible participants of up to (i) 1,352,662 shares of Company common stock to be issued upon the exercise of stock options and stock appreciation rights and (ii) 541,065 shares of Company common stock to participants as restricted stock awards (which may be in the form of shares of common stock or share units giving the participant the right to receive shares of common stock at a specified future date). Restricted Stock Awards . On October 1, 2020, the Company awarded 449,086 shares of common stock under the 2020 EIP with a grant date fair value of $ 10.53 per share (total fair value of $ 4.7 million at issuance) to eligible participants. On April 1, 2021, the Company awarded an additional 4,000 shares of common stock under the 2020 EIP with a grant date fair value of $ 13.86 (total fair value of $ 55,000 at issuance) to eligible participants. These awards vest in five equal annual installments with the first vesting occurring on June 30, 2021. Forfeited shares may be awarded to other eligible recipients in future grants until the 2020 EIP terminates in September 2030. 26 The following table summarizes the restricted stock awards activity in the 2020 EIP during the nine months ended September 30, 2021. Nine Months Ended September 30, 2021 Number of Restricted Shares Weighted Average Grant Date Fair Value Non-vested, beginning of period 431,501 $ 10.53 Granted 4,000 13.86 Vested ( 87,106 ) 10.56 Forfeited — — Non-vested, September 30 348,395 10.56 Total compensation cost recognized in the income statement for restricted stock awards during the three and nine months ended September 30, 2021 was $ 232,000 and $ 851,000 , respectively, and the related tax benefit recognized was $ 49,000 and $ 179,000 , respectively. As of September 30, 2021, unrecognized compensation expense related to restricted stock awards was $ 3.4 million. Stock Option Plan. On October 1, 2020, the Company awarded options to purchase 1,095,657 of common stock under the 2020 EIP with an exercise price of $ 10.53 per share, the fair value of a share of the Company's common stock on the date of grant, to eligible participants. On April 1, 2021, the Company awarded options to purchase 8,000 shares of common stock under the 2020 EIP with an exercise price of $ 13.86 per share, the fair value of a share of the Company's common stock on the date of the grant, to eligible participants. These options awarded vest in five equal annual installments with the first vesting occurring on June 30, 2021. Forfeited options may be awarded to other eligible recipients in future grants until the 2020 EIP terminates in September 2030. The following table summarizes the stock option activity in the 2020 EIP during the nine months ended September 30, 2021. Nine Months Ended September 30, 2021 Number of Shares Weighted-Average Exercise Price Balance at beginning of period 1,095,657 $ 10.53 Granted 8,000 13.86 Exercised ( 12,116 ) 10.53 Forfeited/expired — — Balance, September 30 1,091,541 10.55 Exercisable at end of period 241,083 $ 10.55 The fair value of options granted is estimated on the date of the grant using a Black Scholes model with the following assumptions: April 1, 2021 Dividend yields 1.90 % Volatility factors of expected market price of common stock 26.98 % Risk-free interest rates 1.16 % Expected life of options 6.1 years 27 A summary of the status of the Company stock option shares as of September 30, 2021 is presented below. Shares Weighted Average Grant Date Fair Value Non-vested, beginning of year 1,055,077 $ 2.91 Vested ( 212,619 ) 2.91 Granted 8,000 3.02 Forfeited — — Non-vested, September 30 850,458 $ 2.91 Total compensation cost recognized in the income statement for option-based payment arrangements for the three and nine months ended September 30, 2021 was $ 156,000 and $ 572,000 , respectively, and the related tax benefit recognized was $ 17,000 and $ 63,000 , respectively. As of September 30, 2021, unrecognized compensation expense related to the stock option awards was $ 2.3 million. Note 8: Subsequent Event Subsequent to September 30, 2021 through November 12, 2021 the Company purchased 21,651 shares of the Company's common stock pursuant to the existing stock repurchase program, leaving 1,023,847 shares available for future repurchase. 28